529 Plans: Know the Rules for College and K-12 Qualified Expenses

Contributions made to a 529 are made with after tax dollars, but the earnings on the contributions grow tax deferred, and withdrawals made for qualified expenses are tax free.

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Most people are familiar with 529 plans as they are one of the more popular forms of saving for college. Contributions made to a 529 are made with after tax dollars, but the earnings on the contributions grow tax deferred, and withdrawals made for qualified expenses are tax free.

You can deduct your contributions from your Pennsylvania taxable income up to $15,000 per beneficiary, per year. Married couples can deduct up to $30,000 per beneficiary, per year, provided each spouse has taxable income of at least $15,000.

529 for K-12

In addition to college savings, the Tax Cuts and Jobs Act of December 2017 now allows up to $10,000 per year from a 529 Plan to be used to pay for K-12 tuition. For those who prefer private K-12 education, this at least gives you the opportunity for a little tax relief.

Withdrawals from 529’s for qualified expenses are tax free, but the earnings portion of withdrawals for non-qualified expenses are subject to tax and a 10% penalty.

K-12 qualified expenses are pretty cut and dry:

  • Tuition only up to $10,000 per beneficiary per year can be withdrawn.
  • Board is not a qualified expense.
  • Books, computers, uniforms, or supplies do not qualify.

529 Plans for College

At the college level it gets a little more complex. Tuition, room and board, fees, books, supplies, and equipment required for courses are all considered to be qualified expenses. Keep in mind, however, only fees that are mandatory for enrollment are covered. If your student chooses to join a club level sports team or theatre group that requires a fee, but is not mandatory for coursework, this will not be considered a qualified expense. In contrast, a lab fee associated with a chemistry or biology course, would be qualified.

Equipment needed is another category to consider. If the calculus professor requires a certain type of calculator for his/her class, or the accounting professor requires a specific software, these would be qualified. On the other hand, if your student happens to purchase a copy of J.K. Rowling’s newest read at the campus book store, and it’s not a required text for English 101, this will not be qualified.

Room and Board Costs

Room and board can get a little tricky as well. For students that live on campus and opt for a standard meal plan, there isn’t much to worry about. But not every university or college has ample on campus housing, and not every student chooses an on-campus lifestyle.

If your student lives off campus, the amount that is qualified cannot exceed the room and board allowance that his/her college includes in the cost of attendance for federal financial aid purposes. You can usually find this listed on the college’s website, but the best resource would be to obtain this figure directly from the Bursar or Office of Financial Aid.

If your student lives off campus but utilizes a meal plan by the college, this is also qualified. If, however, your student is grocery shopping or dining out, receipts or records will need to be kept and cannot exceed the amount of board your student’s college lists as a cost for attendance. This is something to consider if your student has a penchant for gourmet pizza.

And last but not least, computers, software, internet access and peripheral equipment like printers, keyboards, and a mouse are all considered to be qualified expenses for college students, but cellphones are not.

In summary, I believe the 529 plan is a good option for both college and K-12 savings. Keeping up with what is permitted and what is not is vitally important, lest you end up paying tax and a 10% penalty on the earnings portion of your withdrawals.

Keep in mind that 529 plans are just one way to save for college. Learn about other plans that can help you manage college costs.

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